Can I deduct expenses paid with a PPP loan? | McGlinchey Stafford

In recently published Decision on revenues 2020-27, the IRS looked at the following two fact models:

  • First, Maria received a PPP loan in 2020 which she used to pay for “covered expenses”. Maria qualifies for the PPP loan forgiveness and she files the forgiveness request in 2020. Maria has a reasonable expectation that her PPP loan will be forgiven when she files the request. IRS says Maria cannot deduct covered expenses she paid or incurred in 2020 on her 2020 tax return, whether or not she receives a notice from the lender before the end of the year that the loan has. been canceled.
  • Then Alexandria, like Maria, received a PPP loan in 2020 which she used to pay for the covered expenses. Unlike Maria, Alexandria decides that she will wait and file a request to cancel the PPP loan in 2021. Alexandria reasonably believes at the end of 2020 that the loan will eventually be canceled. Because Alexandria reasonably believes its P3 loan will be canceled, although in 2021 the IRS says Alexandria cannot deduct in 2020 the covered expenses it paid in 2020.

(In IRS Notice 2020-32, published on May 2, 2020, the IRS clarified that no deduction is allowed for a covered expense that is otherwise deductible if payment of the eligible expense results in the cancellation of a PPP loan. Tax Decision 2020-27 expands on this opinion.)

As shown in the two model facts, the IRS has now decided that no deduction is allowed in both cases because each taxpayer has a reasonable expectation that it will be reimbursed (through the cancellation of the PPP loan) for the covered expenses paid or incurred. The fact that Alexandria will not file its loan forgiveness request until 2021 is irrelevant.

But, to add a third pattern of facts, what about Ana? Like Maria and Alexandria, Ana received a PPP loan in 2020 which she used to pay for covered expenses. Unlike Maria and Alexandria, Ana decides that she never file a pardon request PPP loan even if it meets all the conditions for remission. Recently released sub Income procedure 2020-51, the IRS provides a safe haven that allows Ana to deduct covered expenses. If it makes sense that Ana would have the right to deduct the covered expenses if her P3 loan is not canceled, why was there a need for the IRS to provide advice?

Covered expenses

For a PPP loan to be eligible for forgiveness, it must be used to pay for “Covered Expenses” during the “Covered Period”. The covered expenses are: (1) salary costs, (2) interest on a covered mortgage bond, (3) any covered rent obligation payment, and (4) any covered utility payment. The covered period during which the covered expenses must be paid or incurred is the period starting on February 15, 2020 and ending on December 31, 2020.

Covered expenses are the type of expenses that are generally deductible. However, the Internal Revenue Code (Code) and its regulations have long ruled that no deduction is permitted for any amount otherwise qualifying as a deduction to the extent that the amount is attributable to one or more “classes of”. exempt income ”. The term “exempt income class” generally refers to any income class that is either totally excluded from gross income or totally exempt from tax. This rule applies whether an amount of income in that category or categories is actually received or accrued. In addition, case law has long held that deductions for otherwise deductible expenses are not permitted if the taxpayer receives reimbursement for those expenses.

CARES law and PPP loans

Typically, income includes any amount of forgiven debt, but the CARES Act provides that “any amount that.” . . would be included in the gross income of the qualifying beneficiary due to the rebate [of a PPP loan] . . . are excluded from gross income ”. Section 1106 (i) of the CARES Act excludes amounts written off from gross income, regardless of whether the income is (1) income from the discharge of a debt under section 61 (a) (11) of the Code, or (2) otherwise included in gross income under section 61 of the Code.

Since a PPP loan can be canceled (provided that it is used to pay for expenses covered during the period covered) and there is no income from the cancellation of a PPP loan, all The expenses paid with a PPP loan are attributable to an income category that is exempt from income taxes. Under the general rule that denies a deduction for expenses attributable to tax-exempt income, it does not matter whether the P3 loan is canceled or not. Thus, as a general rule, Ana would probably not have the right to deduct the covered expenses even if she chooses not to request the cancellation of the PPP loan.

This, for most people, would be seen as an unfair outcome for Ana i.e. Ana has to repay the PPP loan but she cannot deduct the covered expenses. The 2020-51 tax procedure clarifies the rules applicable to beneficiaries of PPP loans who are either denied the delivery of the PPP loan or choose not to request the forgiveness. It provides a safe harbor allowing a taxpayer to claim a deduction in the taxpayer’s tax year starting or ending in 2020 (tax year 2020) for covered expenses, if (1) (i) covered expenses are paid or incurred in year d ‘taxpayer’s 2020 tax, (ii) the taxpayer receives a PPP loan, which at the end of the taxpayer’s 2020 tax year the taxpayer expects to be exempt in a tax year subsequent to the tax year 2020 (following tax year), and (iii) in a subsequent tax year, the taxpayer’s request for exemption from the covered loan is refused, in whole or in part; or (2) the conditions of (i) and (ii) above are met but the taxpayer decides never to request cancellation of the covered loan. A taxpayer who meets one of the Safe Harbor requirements may be able to deduct some or all of the covered expenses on (1) the taxpayer’s timely return, including extensions, tax return original or the information return, as the case may be, for the 2020 taxation year; 2 ° an amended declaration or an administrative adjustment request under article 6227 of the Code for the 2020 taxation year, as the case may be; or (3) the original tax return or timely information return filed by the taxpayer, including any extensions, for the next tax year, as the case may be.

Declaration required

To claim the deduction, a taxpayer must attach a statement to the statement on which the taxpayer deducts the covered expenses. The declaration should be titled “Tax Procedure Declaration 2020-51” and should include certain specific information (with references to the provisions of the Tax Procedure) set out in Section 4 of the Tax Procedure. This information includes:

  • The taxpayer’s name, address and social security number or employer identification number;
  • A statement as to whether the taxpayer is an eligible taxpayer because the taxpayer was refused forgiveness of the loan or chose not to request forgiveness;
  • A statement that the taxpayer is claiming the deduction in 2020 or a subsequent tax year;
  • The amount and date of disbursement of the PPP loan;
  • The total amount of the cancellation of the PPP loan that the taxpayer was refused or decided to no longer request;
  • The date on which the taxpayer was refused or decided to no longer request the cancellation of the PPP loan; and
  • The total amount of covered costs and non-deducted covered costs that are declared in the return.

Benefits of the Safe Harbor

The Safe Harbor offers two advantages. First, it allows a deduction for taxpayers who are eligible for forgiveness but choose not to ask. Thus, Ana will have the right to deduct her covered expenses. Second, it gives taxpayers who choose not to request forgiveness or whose loans are not partially or fully forgiven possibility of claiming a deduction in 2020 or a later year for covered expenses, even if the decision not to request the remission or the denial of remission occurs after 2020. This can accelerate until 2020 a deduction that might not otherwise qualify before a taxable year subsequent under general tax principles. It is reasonable to expect that most taxpayers will choose to request the cancellation of the P3 loan rather than claiming a deduction for the expenses covered. For the taxpayer who chooses to forgo the rebate and deduct the covered expenses, being able to claim the deduction in 2020 rather than a subsequent year could present a tax benefit. Net operating losses (NOL) incurred in 2020 can be carried back for five years. While NOLs incurred after 2020 cannot be postponed. In addition, NOLs carried over from 2020 are not subject to the 80% limitation of NOLs carried over.

Elizabeth J. Harris